

Standing Committee B

[Part II]

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

[Continuation from column 164] 
 On Resuming—

Nicholas Winterton: Before I call the hon. Member for Arundel and South Downs, may I tell the Committee that the Chairman has maintained his weight loss? To show that I have been there, I am prepared to give the Government spokesman, the spokesman for the official Opposition and the Liberal Democrat spokesman some sugar-free fruit gums with sweeteners, courtesy of WeightWatchers.

David Wilshire: On a point of order, Sir Nicholas. Although it does not relate to this clause, would it be in order to put on the record that we congratulate you? Those of us who cannot manage to lose weight would like to know how you do it.

Nicholas Winterton: The answer to that is, chair the Finance Bill Committee.
 We are still debating clause 163, which we were discussing when we suspended for the Divisions in the Chamber. I ask the hon. Member for Arundel and South Downs to resume addressing the Committee.

Howard Flight: First, Sir Nicholas, I am glad to see that you have not lost so much weight that we do not recognise you.
 We have explored the clause fully and have clarified it. The guidance notes do not quite make it clear what it is about, but I think that the balance of opinion is that it blocks up a scheme that needs to be blocked up. It contains a substantial penal element, and there is debate on whether such matters should be proportionate, but we do not wish to press the amendment to a vote. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 163 ordered to stand part of the Bill.

Clause 164 - Extension of first-year allowances for ICT expenditure by small companies

Question proposed, That the clause stand part of the Bill.

Howard Flight: I should like to raise some small points. As hon. Members will be aware, the clause rolls over relief for small businesses on ICT expenditure. It is

 worth making the point that it might have been better to announce the extension well before 31 March, which might be an argument for having an earlier, fixed date for the Budget. The result of not knowing whether such a relief is to be rolled over is the inevitable congestion of trying to live within the relief while it exists.
 The title of the clause states that it applies to ''small companies'', but our understanding is that it applies to small businesses. It is a minor drafting matter, but perhaps the description should be ''small businesses''. More generally, the measure is greatly welcomed by the companies that will benefit from it, but it is another minor example that raises the question whether the whole body of such incentives, which come and go, actually work and whether businesses know where they stand. Can the Paymaster General tell us what evidence there is to date of this particular 100 per cent. allowance having been successful in stimulating substantial small company ICT investment?

Jonathan Djanogly: I want to reiterate my hon. Friend's first point. As a result of the late Budget statement, this measure was announced after the end of the financial year. An announcement before the end of March would have benefited companies. In the event, companies tried furiously to empty their budgets before April, when they should not have been put in that position. The Paymaster General should say whether she has any feedback from companies on the impact that the announcement may have had.

Michael Jack: I, too, wish to emphasise and support the line taken by my two hon. Friends. I received representations about the uncertainty. It takes time for the effects of any new allowance to build up and for companies to adjust their investment plans in the light of new announcements. I note that the clause again contains a short-term reconfirmation of this measure. Companies ask, ''When we look forward and plan our information technology strategy, what is our time horizon?'' The time horizon is 31 March 2004. Again an element of uncertainty creeps into our proceedings. Why are the Government seemingly opting for the annual renewal of these measures, when companies want an element of certainty so that they know what their investment programme should be?
 I said on Second Reading that it would be helpful to know the economic effect of these micro-management tax measures. Sadly, the notes on clauses do not provide me with an answer. I am not saying for one moment that for some companies this is not an important tax relief, but, as with all reliefs, it is useful to know whether it works, and most companies want to know whether there will be an element of certainty. I should be grateful if the Paymaster General could address those issues when she replies to this short debate.

Dawn Primarolo: Thank you for the WeightWatchers sweets, Sir Nicholas. I hope that they are magic and that all I have to do is to eat them to lose weight, because the Finance Bill does not seem to help me.

 The allowances were originally introduced at the request of businesses, which lobbied strongly for them to be extended. In considering an extension, I was mindful of the points that the hon. Member for Arundel and South Downs and the right hon. Member for Fylde have made as to whether continuing the relief is the most effective way to support businesses or whether we should discuss with business whether other measures would now be more appropriate, especially if the allowance has matured to the point at which we need to move on and see what else would support business. 
 We could not complete or even properly air that subject before the Budget, so I considered it appropriate to extend the allowance for a year. However, hon. Members will be aware that in the Budget statement my right hon. Friend the Chancellor announced a consultation document on several aspects relating to small and medium-sized businesses. One of them was the significant matter of access to equity. During the conversations and consultation we must also try to address that issue. That is why the allowance is to be extended for one year only. That will give us time for proper consideration of whether an allowance is most appropriate. Obviously, businesses are keen on the allowances and they have been successful, but before making a commitment of more than one year it is appropriate, as the right hon. Member for Fylde suggests, to consider whether that is the best way forward. 
 I can confirm that, as the hon. Member for Arundel and South Downs suggested, the allowance applies to all small enterprises. The hon. Member for Huntingdon asked whether we had had any lobbying or complaints about the fact that the measure was announced at the time of the Budget. To my knowledge, the answer is no. Any small business that invested in ICT between 31 March and the Budget announcement nine days later will be eligible for the allowance under the clause, so we have not received any representations or complaints. Generally, the measure is popular, but businesses accept that it may well have run its course and it is right that the Government should reflect on that before taking any decisions. 
 I hope that that has given members of the Committee an indication of the way that the Government are considering the matter. Of course, the outcome may be that the allowances should remain, so I do not want to concern anyone. It is right to consider the matter again and ensure that it is the right way to support business—this year we believe that it is. 
 Question put and agreed to. 
 Clause 164 ordered to stand part of the Bill.

Clause 165 - Expenditure on software for sub-licensing

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause prevents software qualifying for first-year allowances when it is acquired with a view to sub-leasing. The Paymaster General may be aware that some concerns have been expressed that the clause could prejudice companies engaged in school private finance initiative contracts. Such companies may well incur capital expenditure on software with a view to the software being used by the school or its pupils. I am sure that that is not intended. Perhaps we could be assured that that will not be an unintended by-product of the clause.

John Healey: The clause contains anti-avoidance legislation that continues the Government's commitment to tackling tax avoidance wherever we can. The legislation that was introduced in 2000 gave small businesses 100 per cent. first-year allowances on investment in information and communications technology, such as computers, software and internet-enabled mobile phones. The allowance encourages small businesses to invest directly in that technology and enables them to embrace e-commerce and make their dealings with the Government and businesses faster and therefore more efficient.
 The original legislation prevents a claim to allowances when the technology is acquired for leasing, but not when software rights are licensed out to others. An avoidance scheme has developed, using the loophole by allowing higher rate taxpayers to claim the allowances without expenditure being incurred on bona fide investments. I will briefly describe how the scheme works. It uses partnerships to purchase software. Individuals may put up around 20 per cent. of the money to make the purchase, with the rest being loaned by banks. The software is then licensed back to the software developer. One hundred per cent. first-year allowances are claimed on the total investment, so an individual putting up £20,000 would get tax relief of nearly £40,000 without any risk and without making an investment for the purposes intended to qualify for the relief. The effect of such a scheme is to give participants a risk-free profit at the Exchequer's expense.

Michael Jack: When the Economic Secretary was first exposed to the avoidance scheme, did he ask himself whether he could have seen it coming, and if so, what was the answer?

John Healey: Hindsight is a fine thing, and the right hon. Gentleman will know better than I that there are advisers and others who will work at finding ways around any legislation. We are now trying to tackle an avoidance scheme that has been developed since the legislation has been put in place and confounds the original purpose of the legislation.
 The hon. Member for Arundel and South Downs expressed a concern about school PFI contracts. I can reassure him to a degree but, I suspect, not entirely. The vast majority of expenditure incurred on the right to use software under PFI contracts is likely to be revenue, and will not be affected by the clause. If capital expenditure is incurred on the right to use software, it will continue to qualify for capital allowances. It is only the right to 100 per cent. first-year allowances that might be lost. The original legislation prevents such schemes where the 
 technology is leased, and the clause will put a stop to the attempted avoidance by putting licensing on the same footing as leasing. The clause will not affect bona fide investment in information and communications technologies by small enterprises, and I commend it to the Committee. 
 Question put and agreed to. 
 Clause 165 ordered to stand part of the Bill.

Clause 166 - First-year allowances for expenditure on environmentally beneficial plant or machinery

Question proposed, That the clause stand part of the Bill.

Adam Price: The point about effectiveness has already been made in relation to the first-year assessment. There are two aspects to the degree of effectiveness. One is the vigour by which availability is communicated to the target business sectors, and the other is the certainty with which the businesses can be assured that the support will be available. I should like to address my brief remarks to those two aspects.
 I ask the Economic Secretary how it is proposed that the availability of the provision will be made public. Is the information already on the Revenue's website? Is there an up-to-date list of the specific assets to which the provision applies on that website, and how is that being made available? 
 On the issue of certainty, the schedule relating to the provision allows a certificate to be revoked retrospectively, which is to my mind fairly counter-intuitive. I always thought that one of the great traditions of this place was that legislation does not apply retrospectively. Unfortunately, it seems that certificates can be revoked retrospectively, but no criteria are set out in the schedule to explain why those certificates may be revoked retrospectively. Currently, no right of appeal is available under the provisions. 
 It is perfectly possible that a company could agree to incur some expenditure based on a quite reasonable expectation, given that the Secretary of State or some other authority will have granted a certificate, only to find that that certificate is subsequently revoked. That seems a highly questionable practice. The onus in that case would be on the company to contact the Revenue and inform it that the certificate has been retrospectively revoked. If the company has already filed a return, it will have to inform the Revenue of that change in circumstance. Again, that seems highly questionable. In order to give companies some certainty about the provision and to encourage them to take up the first-year assessment, would not it be simpler if only future expenditure were affected by any retrospective revocation of a certificate?

Howard Flight: I had intended to comment on this matter under schedule 30. However, as it has been raised, I just wish to add that we believe that the reasons for revocation should be specified and that there should be provision for appeal against a refusal to issue or a revocation of a certificate. As has been pointed out, it is inappropriate that a certification could be revoked simply because, for example, the
 Secretary of State changed his or her mind about whether plant or machinery was environmentally beneficial, particularly if the taxpayer has agreed to incur expenditure in reliance on the certification of environmental benefit.
 I have encountered businesses that have faced problems because of a degree of discretion or lack of clarity on a parallel type of benefit. Such businesses did their planning on the basis of their accountant's assurances that they were entitled to the benefit, and then it all changed. That is something that needs to be tightened up.

Jonathan Djanogly: It is a pleasant change to see the Government inducing companies to follow an environmental policy by way of carrot rather than by way of sticks such as the climate change levy. I fully support using capital allowances to encourage companies to make environmentally friendly investments. However, before we discuss the particulars of the schedule, I wish to note my concern that the clause does not provide for a right of appeal.

John Healey: Clause 166—I note that we are straying somewhat to schedule 30, so I shall incorporate it in my comments—will enable businesses to claim a 100 per cent. first-year allowance on investments in designated environmentally beneficial technologies. The scheme is an important part of the Government's commitment to protecting the environment and conserving natural resources while continuing to ensure the competitiveness of UK industry.
 The qualifying technologies and products will be specified in the water technology list, which will be issued by the Department for Environment, Food and Rural Affairs during the summer. It will be issued on the Department's website, which will give full details of the technologies and the criteria, as was done for the energy scheme that we introduced in 2001. The technologies on the list have been chosen for their potential to minimise water use or to improve water quality.

Michael Jack: The Economic Secretary may be anticipating my question. Without giving a definitive list, can he give us a flavour of the type of equipment that would qualify? What main areas will be included in DEFRA's list?

John Healey: I shall be happy to do that, if I may just complete the point that I had begun about the genesis of the clause and of the technologies list that will be published. The list, which has been painstakingly put together, represents a settled view on the technologies that we believe are environmentally beneficial. To that degree, it should provide the sort of certainty for which the hon. Members for Arundel and South Downs and for East Carmarthen and Dinefwr were looking.
 We have developed clause 166 and schedule 30 after detailed consultation. In summer 2001, the Treasury announced consultation on the green technology challenge, a scheme to identify and encourage the 
 use of environmentally friendly technologies through the use of enhanced capital allowances. In the pre-Budget report of 2001 Ministers announced that we were investigating three key areas: further energy-saving technologies, cleaner vehicles, and fuels and technologies—as in this instance—that minimise water use and improve water quality. 
 DEFRA published a report of its work on the development of ECAs for water technologies in February 2002. Since then, it has been discussing the technologies, the qualifying criteria and the detailed workings of the scheme with manufacturers, users, other Government agencies and regulatory bodies. In the 2003 Budget, the Chancellor confirmed the introduction of ECAs, which we see in the Bill. 
 I shall give the right hon. Member for Fylde an idea of the sorts of technology included. The first water technologies to be introduced will be metering and monitoring equipment, flow controllers, leakage detection equipment, and efficient taps and toilets. 
 The hon. Members for East Carmarthen and Dinefwr and for Arundel and South Downs raised concerns about the revocation of certificates. Perhaps I can explain. New section 45I, introduced by the clause, deals with items that are too specialised or complex to be included in the generic list of products in new section 45H. In particular, a certificate may be granted before an asset is completed, on the basis that the design meets the necessary criteria. 
 In practice, the most likely circumstance in which a certificate would be revoked would be where an asset was not built to the certified specification. A taxpayer's claim may be based on the asset being constructed to a particular design, and if that asset is completed in a way that does not conform to that design specification, there may be no entitlement to the allowances. In such a case, the certificate would rightly be revoked. 
 The scheme will deliver real benefits to both business and the environment. I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 166 ordered to stand part of the Bill.

Nicholas Winterton: Before we move on to schedule 30, I understand from the usual channels that it is their hope that we might complete clause 173, which Members will see on the amendment paper, at this sitting. If we are to do that, we have a lot of ground to cover. I point that out because I understand that there will be a Division in the Chamber at about two minutes to 8 o'clock. The usual channels have decided that we should perhaps end our sitting at approximately that time.Schedule 30 First-year allowances for expenditure on environmentally beneficial plant or machinery

Schedule 30 - First-year allowances for expenditure on environmentally beneficial plant or machinery

Howard Flight: I beg to move amendment No. 135, in
schedule 30, page 360, leave out lines 26 to 28 and insert— 
 '(5) Where this section applies, the expenditure is apportioned under section 562(3) (apportionment where property sold with other property) subject to the limitations imposed by this section.'.
 New section 45I of the Capital Allowances Act 2001 provides that the Treasury may by order provide that no allowance on environmentally beneficial plant or machinery may be made unless a relevant certificate of environmental benefit is in force. New section 45J is intended to provide an alternative method of apportioning expenditure to that provided in section 562(3) of the 2001 Act, where one or more of the components of a particular plant or machinery are of a description specified by Treasury order. However, the new section as drafted seems merely to limit the expenditure that can qualify for capital allowances on environmentally beneficial plant or machinery. The amendment therefore proposes that section 562(3) should continue to apply, subject to the limits imposed by new section 45J—in other words, that apportionment should be provided for. Without our amendment, expenditure on other items may not qualify for allowances. That is the Government's objective and I hope that the Economic Secretary will make a statement to that effect. The clause could have been drafted more clearly.

Michael Jack: On a point of order, Sir Nicholas, now that the amendment has been proposed by my hon. Friend the Member for Arundel and South Downs, I seek your guidance on whether its terms and the way in which it has been proposed are narrow enough subsequently to allow a stand part debate on schedule 30.

Nicholas Winterton: I have yet to hear the ministerial reply. Although the hon. Member for Arundel and South Downs has spoken, I had not yet proposed the Question that the amendment be moved formally so that it could be subject to debate. I am now proposing the Question.

Jonathan Djanogly: Various questions arise following an examination of the schedule. I agree with my hon. Friend the Member for Arundel and South Downs about the lack of definition. I am sure that the Treasury has a good reason, but it seems bizarre that the qualification of expenditure will not apply if the equipment is second-hand. We are discussing environmentally friendly equipment and it is ironic that the green allowance system rejects recycling as a qualification. What is the reasoning behind the system?
 Can the Economic Secretary explain the process by which the Treasury would order the certificate of environmental benefit? How would it make a judgment and would that judgment be based on reports? Does it intend to use a panel of experts? Has it already decided which items will comply or will the process be ongoing? That question applies not only to whether the equipment works but to the definition of a friendly environment. Would the allowance apply to building an incinerator from which power could be generated? There are a few questions relating to the subject matter and I shall be interested to hear the Economic Secretary's response.

Michael Jack: I want to pursue the same point as my hon. Friend. The equipment that qualifies for the allowance must be unused and not second-hand. If a
 manufacturer of a qualifying piece of equipment had a demonstrator, took it round to various users of the equipment, convinced them of its efficacy and subsequently sought to sell it, it would not qualify for the allowance because of paragraph 1(a). As far as the company is concerned, however, it would be an entirely new purchase because the company would have been convinced by its effectiveness and would therefore want to purchase it.
 If someone took a demonstrator back in-house to undertake some rudimentary refurbishment—perhaps a new coat of paint—they could claim that it was new. They could tell a potential user, ''You know it's the demonstrator and I know it's the demonstrator. We have put a new coat of paint on the outside so it looks new and we will give you a discount.'' We could have a wholly artificial situation in which a used, second-hand piece of equipment would technically qualify for the allowance although it was not what it purported to be. 
 Our discussions of avoidance were interesting. There may be a rational explanation of the provision but it has defeated my understanding, particularly when it comes to encouraging the uptake of environmentally important equipment. For example, margins are tight in the horticulture industry. If people want to move from a less environmentally friendly regime to a more environmentally friendly regime, they might only be able to afford second-hand or refurbished equipment. My hon. Friend the Member for Huntingdon made an excellent point about not encouraging recycling. I am concerned about not encouraging artificiality when the objective is to introduce new types of equipment. 
 On suggested new section 45H(1)(c), what is the reasoning behind 
''it is not long-life asset expenditure''?
 A new pipe system that did not leak might be installed to replace a leaky system. Pipes are a long-life asset and have a separate and special tax regime. There may be a rationalisation of why an enterprise that seeks to minimise water loss should be penalised because an item is a long-life rather than a short-life asset and I shall be grateful if the Economic Secretary will explain it. 
 New section 45I(3) deals with the certification arrangements. I note that there are separate arrangements for certification for each of the devolved or assemblied parts of the United Kingdom. How will the measure ensure consistency? If there are different certification mechanisms north and south of the Scottish border, there are the usual arguments about what happens to an enterprise that straddles the border. Would such an enterprise get a better deal on one side of the border than the other? I do not want to labour the point because I am sure that the Economic Secretary understands it. 
 Finally, paragraph 4 of schedule 30 deals with first-year allowances. Is there a carry-forward provision because a new enterprise may not have any profits in year one against which to use them? It would be helpful to know whether they can be carried forward.

John Healey: The discussion has been interesting. I shall try to deal with the important points, finishing
 with those raised by the hon. Member for Arundel and South Downs.
 The right hon. Member for Fylde and the hon. Member for Huntingdon asked why second-hand equipment does not qualify for the particular tax treatment. Members of the Committee will recall that I placed clause 166 in the context of the green technology challenge, which the Government launched in 2001. The scheme, which covers water technologies, cleaner vehicles and fuels and energy-saving technologies, aims to encourage businesses to invest in state-of-the-art, environmentally beneficial technologies that are innovative and have yet to achieve market penetration. It is not designed for long-life assets, as the right hon. Member for Fylde argued, or reused assets, as the hon. Member for Huntingdon argued. In the same way as the existing first-year allowance schemes, it applies to new and unused equipment—to do otherwise would dilute its focus. 
 The hon. Member for Huntingdon also asked about heat-generating equipment. I have tried to explain—the explanatory notes make this clear—that clause 166 deals with water technologies, so the answer to his question is no. 
 As we do with other schemes, we shall keep the operation of this provision and the scheme for water technologies closely under review. We shall consider extending or amending the list of qualifying technologies, if there is evidence to show that there is a case for doing so.

Michael Jack: I am grateful for the Economic Secretary's attempt to clarify, but I come back to the point that I made. Could he deal with the prototype situation? If a prototype of a state-of-the-art piece of equipment that qualifies for the allowance has been in use for six months as part of a trial experiment, it cannot be determined as new. How is such a piece of equipment dealt with under the clause?

John Healey: It is dealt with in the following way. The manufacturer of the equipment will assess, according to the criteria that DEFRA will publish over the summer, whether it believes that the technology fits the criteria and warrants this special relief. The manufacturer would then apply to DEFRA for an assessment and the issue of the certificate.

Michael Jack: I am sorry to press the Economic Secretary on this point. I understand his point about the novelty of the technology, but if the equipment was a prototype that had been used for six months, by definition it could not be determined as new. To my understanding, new means unused. Could the Economic Secretary deal with that, because in the world of new technology, he has only one piece of equipment?

John Healey: The terms that the right hon. Gentleman uses do not enable the Committee to shed further light on his question.

Michael Jack: It is the Economic Secretary who should be shedding light, not the Committee.

John Healey: If the equipment and the technology are a prototype, that implies that they are still new. The only answer to the right hon. Gentleman's question is, as I explained, that the manufacturers of the equipment will consider the criteria to be issued by DEFRA over the summer and decide whether they believe it meets the criteria. They would then submit an application for certification under this scheme to DEFRA, which would make the judgment.

Howard Flight: If I understand what the Economic Secretary has just said, he was giving a definition of new which was not ''This is in no way second hand'' but, ''This equipment has a technological aspect to it which puts it into a new category, so it has nothing to do with ownership''.

John Healey: I am not trying to define the term ''new''. I was explaining, in response to direct questions, that this is not a scheme devised to support assets that are necessarily reused or long-life. The definition and then the judgment of what will constitute a qualifying technology will be produced by DEFRA and will be the conclusion of a detailed set of discussions and consultations about the qualifying criteria and the types of technology that should be supported. Those discussions and consultations have been held with a broad range of manufacturers, users and other Government regulatory agencies. That is the point at which to encourage manufacturers of such technologies to examine the published criteria and decide whether it would be appropriate to submit an application for such a certificate.

George Howarth: Surely the problem with the question put by the right hon. Member for Fylde is that he was describing a demonstration model, not a prototype. If it was a demonstration model in the car industry, inevitably it would be sold as a car that had been used for demonstration purposes, which is entirely different from a prototype.

John Healey: My hon. Friend adds a further dimension to our debate, to demonstrate how tricky will be the decisions, and the questions that DEFRA is currently weighing in consultation with a range of interests, and makes the case that the Bill is not the appropriate place in which to legislate for and specify such definitions. That is not what we are doing in the clause or the schedule.

Jonathan Djanogly: I wonder whether DEFRA has consulted on the list. Does a list exist already and what is the process by which items are put on it? The Minister said that we are discussing only water technology at the moment. Is there a list of approved water products?

John Healey: The hon. Gentleman may not have been listening earlier, but I have been at pains to point out the length and breadth of the consultation. I say again that DEFRA has been in detailed discussion with a range of interests, from manufacturers to users to regulatory bodies, on what might constitute appropriate technologies and the criteria for defining those. Confirmation of those qualifying technologies and the criteria for them will be published in the water technology list when the Bill has received Royal
 Assent. That is the appropriate place in which to publish the information, not the Bill.

Jonathan Djanogly: Fine. Thank you very much.

John Healey: I am glad that the hon. Gentleman has now got the point.
 Turning to the comments of the hon. Member for Arundel and South Downs on amendment No. 135, we do not believe that such a change is necessary, particularly as it would add to the complexity of the new scheme and could reduce the amount of expenditure qualifying for the new 100 per cent. allowances. The Bill provides an appropriate method of apportionment. The Treasury order to which new section 45J(1) refers will specify the actual amount to be treated as the cost of a particular product if it is used as a component in a larger item of plant or machinery. New section 45J will ensure that the part of the expenditure qualifying for 100 per cent. first-year allowances does not exceed that amount. 
 New section 45J is closely modelled on section 45C of the Capital Allowances Act 2001, which was enacted when the scheme offering 100 per cent. allowances for energy-saving plant or machinery was introduced. No problems have arisen in practice from the operation of section 45C of that Act and the use of a different method of apportionment in essentially similar legislation would add unnecessary complexity and could cause confusion. I encourage the hon. Gentleman to withdraw his amendment and my hon. Friends to support the schedule unamended.

Michael Jack: I have listened carefully to the Minister, but in a world of novelty the definitions that he gave refer to ''new'' as in technology and do not address what is in the schedule, which refers to
''machinery that is unused and not second hand''.
 A company might work with the developer of a new piece of technology—for example, putting money into the development of the novel technology—using the equipment in the company's factory. The point will come when the technology has become established and the unique piece of equipment is working. A decision must then be made on whether the company buys it outright. By definition, if it has been a unique piece of equipment with unique, ground-breaking technology, it will have been used. If it has been used, it must, by definition, be second hand. The novelty is there with the environmental benefits, but if that technology receives its certificate, it would not qualify for the relief. The Treasury must sort that out one way or another.

Nicholas Winterton: Does the Minister want to respond to that point?
John Healey indicated dissent.

Howard Flight: I was not entirely happy with the Minister's response. May I draw his attention to the specific points made by the Institute of Chartered Accountants and spell out the point in a little more detail? The institute comments that it finds it
''difficult to discern the exact effect of new section 45J without seeing an example of the Treasury order in question.'' 
From reading section 45J(2), it states that 
''it appears that the order would simply specify a maximum amount which can be treated as section 45H expenditure in respect of the component in question. That would not in itself displace the basic rule that the amount qualifying for capital allowances of any sort cannot exceed the expenditure incurred on the asset in question. Hence it appears that an apportionment would still be necessary in order to establish the expenditure actually incurred on the component, and that the disapplication of section 542(3) CAA 2001 by section 45J(5) is therefore inappropriate.''
 It also rightly raises the issue of what might be 
''the circumstances under which a certificate of environmental benefit, once issued, might be revoked''.
 The institute raises the same concerns that I expressed with regard to the last clause.

John Healey: We always take seriously the representations of the Institute of Chartered Accountants. The provision that the hon. Gentleman is concerned about is modelled closely on section 45C of the Capital Allowances Act 2001. No problems have arisen with the operation in relation to energy-saving technologies. However, I shall look again at the point that the institute raises.

Howard Flight: I thank the Economic Secretary for his comments. On that basis, the point is made, and I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 60, in 
schedule 30, page 360, line 37, at end insert— 
 '(2) In section 46(5) for ''or 45E'' substitute '', 45E or 45H''.'.—[John Healey.]
 Schedule 30, as amended, agreed to.

Clause 167 - Relief for research and development

Question proposed, That the clause stand part of the Bill.

Howard Flight: I welcomed on the Floor of the House the reduction of the minimum expenditure requirement in both schemes to £10,000. Also welcome is the inclusion of the costs of agency workers. The Institute of Chartered Accountants has suggested that in relation to agency workers there may be a need to amend schedule 20(16)(1)(b) of the Finance Act 2000 to include pay-as-you-earn and national insurance contributions for agency workers. I pass on its comments that it looks forward to further consultation.
 Given that the proceedings on the Floor of the House did not get as far as considering the amendment in relation to North sea exploration, will the Economic Secretary explain the Government's thoughts on whether the provision might be extended to certain aspects of that exploration?

David Laws: This seems to be a relatively uncontroversial—

Nicholas Winterton: The hon. Gentleman is about to wax lyrical, but unfortunately the Division Bell is ringing. Clearly there is a Division in the Chamber. I will suspend the sitting for 15 minutes and I ask hon. Members to be back by 7.14 pm.
 Sitting suspended for a Division in the House. 
 On resuming­

Nicholas Winterton: I apologise to the Committee for the time that has been wasted. It was neither my responsibility, nor that of the Committee. Having suspended, it is impossible to proceed until the time that I have stipulated is reached.

David Laws: The clause is still relatively uncontroversial and seems to have been welcomed by many of the tax practitioners and others who comment on the Finance Bill each year. However, before we move on, I want to shed a little light on the clause and ask the Economic Secretary to respond on a number of points.
 I particularly wanted to pick up on the clause because it relates to the other side of the debate. We have been considering Government efforts to close tax loopholes and reduce the leakage in taxes that results from legitimate and legal tax avoidance. With this clause, we have the flip side of that situation. We have a Government-sponsored tax loophole that is designed to promote a particular activity that the Government feel is beneficial. 
 Even the measures that update the research and development tax credit that used to exist are not insignificant in their effect, because they involve expenditure of some £20 million in the 2003–04 tax year, rising to £40 million and then £50 million in the years that follow. It is easy to wave such measures through Finance Bills; people tend not to speak against proposals that involve the Government giving away their money, or the public's money. However, those measures can come to grief in later years when the Government discover that in trying to establish tax reliefs to promote particular activities, they have ended up creating the type of tax avoidance that they have to return to later to close loopholes that they have opened. The Government's experiences in relation to the film tax relief show us why we should be relatively cautious about such measures. 
 Will the Economic Secretary tell us whether there has been a specific study by the Treasury of the measures that are being brought in under the clause and the associated schedule? Has there been a study of the effects and the potential for tax avoidance under the clause, particularly in respect of the items that are being introduced and that explain the rising costs­£20 million, £40 million, £50 million­to the Government of the measures? Has there been an assessment by the Treasury of the scope for tax avoidance and are the Economic Secretary and his colleagues considering any measures to reduce the risks? 
 To return to the point made by the right hon. Member for Fylde, has there been an assessment of the economic benefits of the measures? We know roughly what the Treasury expects their cost to be over the next few years. It would be useful to have a little information about why, in percentage terms, the cost of the measure rises so rapidly over three years. Has 
 there been an assessment of the economic benefit of the expenditure from the public purse and of how much of the expenditure will essentially be deadweight cost relating to research and development that would have occurred anyway? How much new research and development do the Government expect to be initiated by the measures that they are bringing in? 
 There is also the complexity that results from such measures. That is probably the only point on which there has been general criticism of the clause from the various tax bodies. The tax law committee of the Law Society of Scotland criticises the clause for its complexity. It believes that the legislation remains too complex and that the changes being introduced merely add to that complexity for businesses. 
 Obviously, there is tension when making legislation more complex to avoid the risk of stimulating tax avoidance; we might come to that in the debate on schedule 31, so I will not go into it now. However, there is clearly tension between simplicity­the objective that the tax law committee does not feel that the Government have met­and measures to ensure that opportunities for tax avoidance are not opened up. The Government's effort to control the scope for tax avoidance may then lead to complexity that requires companies, for example, to employ outside advisers to assess the ways in which they can exploit those loopholes. That must then have an effect on the benefit of the measures, because other costs arise from policing them and helping companies to understand them, which may diminish the value of reliefs such as the research and development tax credit and the new measures being introduced. 
 The final point that I want the Economic Secretary to touch on is whether he is contemplating a time limit on this relief in the same way as the Government have set time limits in other clauses that we have debated. We have, we hope, an assessment of the risks of tax avoidance activity and the potential benefit or costs of the measures; in addition, built into the process is an evaluation by the Treasury and Parliament to see whether these types of relief are working.

Dawn Primarolo: I want to touch on the three points that the hon. Member for Yeovil (Mr. Laws) has just made­assessment avoidance, dead weight costs and the benefit to companies­and then on issues relating to complexity, before turning to some of the points made by the hon. Member for Arundel and South Downs.
 I have been a Minister in the Treasury for six years and I spent nearly three years as a shadow Treasury Minister. One thing that always strikes me is that when companies want an advantage, they want a relief; when they do not like something, they scream complexity. The hon. Member for Yeovil should look at the submissions made to all members of the Committee by the various lobby organisations and trade representative bodies when we were receiving the Budget submissions and apply the test. Would they make it more complex, if they were asking for money? Yes, because it would be a relief. Would they like some obscurity in the tax law to give them wriggle space, as 
 they would call it; we would call it possibilities for tax planning? The answer is yes. Would they like us to subsidise things that they were already doing? The answer would be yes. Every Government must look at those representations and make a judgment. 
 Indeed, our consideration of anti-avoidance mechanisms in the Committee revolves around whether we should permit an activity, whether our proposals are too complex or whether we should leave the tax system alone because companies quite like it the way it is.

David Laws: Does the Paymaster General agree that it is not only businesses that often see these things from two different angles? Governments do so, too. When Governments do not like certain forms of tax avoidance activity, they describe them as the exploitation of tax loopholes; when they like to create loopholes, they call them such things as the research and development tax credit, or the films tax.

Dawn Primarolo: No, the hon. Gentleman has got it entirely wrong. In the period that I have been in the Treasury, I have made numerous comments on that issue in Committees and elsewhere, inside and outside the House. I do not call a measure anti-avoidance if it is not, nor does my hon. Friend the Economic Secretary.

David Laws: Will the Paymaster General give way?

Dawn Primarolo: Just one moment, please. I can answer one set of questions at a time. The judgments that we make as Ministers ensure we act properly on the advice that we receive from our civil servants. Those civil servants­I am not supposed to refer to them directly­have very rigorous tests. The problem is that, inevitably, there has to be some trust; that is the right approach to making law. We have to trust that businesses will operate legislation according to the purposes for which it was designed in good faith.
Mr. Laws rose­

Dawn Primarolo: If they do not, the Government are fully entitled to act. I will give way to the hon. Gentleman again, but I realise that I am going a little wide of the clause. What the hon. Gentleman raises goes to the heart of the balancing of decisions that Governments make about fair taxation, choices and intervening where there is market failure, without allowing tax issues to distort commercial activity, which would allow that activity to be tax driven. It is a difficult balance, but it is one that Governments make.

David Laws: Does the Paymaster General agree with me that looking in retrospect at film tax relief, for example, it would not have been sensible when that measure was debated to rely simply on trust that people would not exploit and abuse the relief in a serious way, leading the Government to return to the House to put anti-avoidance legislation in place?

Nicholas Winterton: Order. I think that the hon. Gentleman has made a point, but the clause is not about film tax. The Paymaster General has ranged broadly to respond to some of the points made, but I do not wish to interfere in the debate.

Dawn Primarolo: Suffice it to say, I absolutely do not agree with the hon. Gentleman's last point. We
 have not reached the point of ''1984'' where we are all-knowing, all-seeing, all-doing and all-permitting. All Governments have found themselves in this position, and if the hon. Gentleman ever finds himself anywhere near Government, he will find out that such decisions are difficult, and occasionally Governments make mistakes.

Adam Price: Will the Paymaster General give way?

Dawn Primarolo: If it is specifically about the clause. Although I am fascinated by a debate on general tax policy­it might lead to some consistency­you might pull me up, Sir Nicholas, were I to continue with it.

Adam Price: Has a specific assessment been undertaken by the Treasury in relation to the proposal of the relative benefits of a grant aid system as opposed to a tax relief system?

Dawn Primarolo: The question of whether there is a grant or tax relief would also be considered very carefully by the Treasury. The demand for a research and development tax credit came from business. There was a long period of consultation with business, Government and all interested parties. The specific point that needed to be addressed was the importance of investment in research and development in relation to productivity levels in the future of the UK economy.
 On the point made by the hon. Member for Yeovil, of course there would be a certain amount of deadweight cost in such a relief, because some companies were already undertaking research and development, but the purpose of the provision is to create more research and development and to bring investment in it up to the levels it has reached in the United States. On that basis, the operations so far, in terms of the companies taking up the research and development tax credit, have demonstrated that it is working well. It is clearly taking time to build up because companies need to take decisions and plan for what they know is going to be in the system to support them. Something like 3,000 small and medium-sized companies are now applying for tax credits, to the value of some £150 million. We definitely and desperately need to invest in that sector and see it grow. 
 One reason why we revisited this issue for small and medium-sized companies­the purpose of the clause­was my concern that some of those businesses that perhaps have a small expenditure on research and development at the moment have been excluded from the provisions. Although the sum involved might seem small in terms of the greater scheme, it is an important sum to those companies. 
 The arrangements in the clause are designed to ensure that those micro-companies currently doing a small amount of work on research and development are not excluded. They were excluded from the previous scheme in the interests of simplicity, but in the interests of fairness and to encourage investment in the economy, they should not be excluded. That brings 
 us back to the trade between simplicity on the one hand and fairness and the original aims on the other. 
 The hon. Member for Arundel and South Downs raised two specific points. The first was on paying the PAYE and national insurance liability of agency workers. As he well knows, companies are allowed to claim those payments as qualifying expenditure when they are made to intermediaries such as agencies for the provision of staff. However, such staff are not employees of the company, which will therefore not be paying any national insurance or PAYE for them, so why should we reimburse them? The potential to exploit avoidance is what the hon. Member for Yeovil might be thinking about. The position is perfectly reasonable and straightforward. That is not a cost on the company so is not deductible. 
 The hon. Member for Arundel and South Downs asked a question about the North sea. As he knows, the definition excludes oil exploration and appraisal. However, although it is nothing to do with this clause, the hon. Gentleman might have noticed in the Budget announcement that the Government are setting up a consultation group specifically to examine exploration and cost, particularly for small and medium-sized companies working in oil fields that are reaching the end of their lives. During the next six months, we will want that group to consider whether there are cost-effective ways of assisting that extra exploration. 
 I have not ventured into the amendments because I understood that we are discussing only the clause at this stage. I hope that my comments have given the Committee an idea of the Government's intentions. We are trying to ensure that at every point the tax credit can get to those who need it most, such as struggling companies that are absolutely at the beginning of research and development and need that encouragement and assistance from the Government.

Nicholas Winterton: Order. We are discussing only clause 167 stand part at the moment. We shall come on to schedules with amendments a little later.
 Question put and agreed to. 
 Clause 167 ordered to stand part of the Bill.

Schedule 31 - Tax relief for expenditure on research and development

Howard Flight: I beg to move amendment No. 136, in
schedule 31, page 362, leave out lines 32 and 33 and insert - 
 '(3) Omit paragraph (a) (person spending less than 20% of total working time on relevant research and development).'.
 In determining whether expenditure on salaries qualifies as R and D and is hence eligible for the enhanced tax credit, if a director or employee spends more than 80 per cent. of his total working time on relevant R and D, all the staffing costs related to him are treated as attributable to relevant R and D. That rule was a helpful simplification of the legislation to encourage research, and it avoided compliance costs by identifying minimal amounts of expenditure that would not qualify for tax relief. Equally, costs were ignored if the employee spent less than 20 per cent. of 
 his time on R and D. The ability to round 80 per cent. up to 100 per cent. and to ignore insubstantial amounts of time was a useful deregulatory simplification, and its removal from the schedule will increase compliance costs and, in a sense, make the relief less generous. 
 Amendment No. 136 would retain the 80 per cent. rule but repeal the rule that prevents time of less than 20 per cent. counting for relief. The 20 per cent. minimum, about which one might argue either way, is intended to protect the Revenue against small claims, but there is already a de minimis level in the legislation. If taxpayers want to take advantage of the incentive, they should be able to do so. The 80 per cent. rule was a simplification measure that ensured that taxpayers did not have to calculate small amounts of central management time incurred by an R and D director that would otherwise be disallowed. In short, are not the proposals in the Bill overly complicating a rough and ready formula that had actually worked very well?

Dawn Primarolo: I do not agree with the hon. Gentleman's amendment, and I shall ask my hon. Friends to oppose it if he presses it to a vote this evening. He mentioned a rough and ready formula, but he well knows that it is not unreasonable for the Government to continue to ensure that relief goes where it was intended to go.
 Under the present laws, as the hon. Gentleman rightly says, staff expenditure of less than 20 per cent. does not count and the company is not able to get the credit. At one end, that has proved to be unfair to the companies that are excluded and denied the opportunity to grow and to dedicate more and more of their expenditure to R and D. At the other end, once companies spend 80 per cent., they simply say that it was 100 per cent. That was allowed to simplify the rules, and it goes to the nub of our earlier discussion. 
 Something may be easy to operate, but does it deliver the objective? We intended the rule as a simplification. However, with practical experience of the R and D tax credit and the consultation that took place during the past year, it became clear that some small companies in particular were missing out completely because they simply were not spending enough at that time. It is right to change that.

David Laws: Does the Paymaster General believe that that particular aspect of the relief was abused by some businesses in which people spent only a proportion of their time on R and D but were illegitimately claiming the full allowance?

Dawn Primarolo: They were not illegitimately claiming the allowance. We said that a company could round up to 100 per cent. once it got to 80 per cent.­it did not have to go beyond that. This is not a question of abuse but of what was allowed in the legislation, which was arrived at with the support of the Liberal Democrats after extensive consultation on where we should strike the balance between simplicity and fairness.
 To draw in those companies spending less than 20 per cent., we had to consider how much more the relief would cost the Government, but the hon. Member for Arundel and South Downs wants both ends. He wants companies that spend up to 80 per cent. to be able to claim the 100 per cent., but he also wants changes at the lower end, which would be dropped much lower. Our view is that that cannot be delivered. I can understand that companies would still wish to retain the 80 per cent. rule, as that gives them tax credit beyond what they spend, but it is clear that the simplest and fairest approach is the one that we have adopted. Although the rules are slightly more complicated than they were originally, they are fairer to the majority of taxpayers. As the R and D tax credit develops, we shall continually monitor whether it delivers the intended outcomes.

Howard Flight: I thank the Paymaster General for her response. I am simply proposing that the position stays as it is, ignoring the 20 per cent. and rounding the 80 per cent. up. I understand the issues. I do not want to go back down the track, as in the picture painted by the hon. Member for Yeovil, but there is a problem, particularly for small companies. In trying to make the system fair and effective, the more complex we make it the greater the possibility that it will not work and will not be used.

Dawn Primarolo: The hon. Gentleman and his party are always telling us that we should listen to business. Does he agree that the Government have listened to business, particularly small businesses, and this is what we are saying would help them? There is a conflict in his argument. One minute he is saying that we should listen and now he is saying that we should not.

Howard Flight: I do not think I have said that we should listen to business, but I certainly believe it. The Paymaster General knows that that is not what the debate is about. Business will always push for whatever it can get and as much as it can get. I am well aware of the argument­I raised the point on the Floor of the House­that the R and D incentives in Canada and in some EU countries are still more generous than ours. There is also the argument about being competitive, and on and on we go. However, if we are not careful, we will end up with a lot of specific incentives that are used for tax avoidance and that we must draw tighter and tighter if they are to deliver. I am in the process of studying all the schemes that have been introduced since 1997 to see what they have delivered and whether they have met expenditure forecasts. The work so far supports the free market argument that many items have not worked out as they were supposed to.
 In the interests of time, this is not an issue that I wish to put to the vote: the argument is debatable either way. However, if there is an overwhelming case for such incentives, we want them to be as simple as possible. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Schedule 31 agreed to. 
 Clause 168 ordered to stand part of the Bill.

Schedule 32 - Tonnage tax: restrictions on capital allowances for lessors of ships

Question proposed, That this schedule be the Thirty-Second schedule to the Bill.

Michael Jack: I am intrigued that the schedule makes changes to the tonnage tax, because we were told when it was introduced that it was one the most consulted on measures. Can the Minister enlighten me as to why, if all aspects that should have been covered were so closely gone over, the problems encountered with operating leases, for which the measure now seeks to curtail tax relief, were not noticed at the time?

Dawn Primarolo: When the tonnage tax was established, certain shipping, particularly luxury cruise liners and large gas tankers, should not have had access to tonnage tax relief. The Standing Committee discussed the question of tax authorities going too far or being too draconian in trying to cover every possible avoidance. However, a new device was developed, which would have led to a massive loss of tax, which we did not intend, and the Government announced last year that we would move to prevent that. We consulted with the industry to ensure that we were closing only that device and not weakening the tonnage tax, and that is what we have done.

Michael Jack: Is the Paymaster General putting on the record that the Inland Revenue was unaware that vessels of the types that she described could be operated under an operating rather than a finance lease? My information is that that was known.

Dawn Primarolo: No, I am not saying that we did not have knowledge of that. I am referring to the specific avoidance mechanism that the provision seeks to deal with and only that. That is the point of the provision. I was not suggesting that the leases are devices; I was saying that the mechanism that gave a route for payment through the tonnage tax was a new tax planning device, which we have now closed.

Howard Flight: That demonstrates yet again the inevitability of measures such as the original tonnage tax, which create a major cliff edge between fully taxable activities outside the regime and those within the rules, opening opportunities for taxpayers.
 I want to raise a couple of matters that the Law Society has raised. The schedule inserts new paragraph 89A into schedule 22 of the Finance Act 2000 which sets out exceptions to the quantitative restriction on capital allowances for lessors of ships in paragraphs 94 to 102 of that schedule. Clarification is sought concerning the operation of paragraph 89A(4) in two circumstances. First, leases commonly contain sales agency provisions allowing the lessee to sell the ship at the end of the period of charter as agent for the lessor. Confirmation is sought that such arrangements do not fall within paragraph 89A(4)(c) in respect of whether they expressly preclude the lessee or person connected with the lessee from acquiring the vessel. Secondly, confirmation is sought that the condition in paragraph 89A(4)(c) will be satisfied provided there are no relevant arrangements when the charter is entered 
 into and that the conditions would not be breached if arrangements came into existence subsequent to the charter being entered into. 
 The Paymaster General may not be able to answer those questions now, but they are outstanding technical issues.

Dawn Primarolo: With regard to paragraph 89A(4)(c), unless there is an express preclusion of the ship being sold to the lessor or any connected party, the existence of such a clause would amount to arrangements under which they might acquire the ship. New paragraph 89A(4)(c) will apply, but there is no problem in paragraph 89A(4)(c) applying where the lessee acts as sales agent for the ship's lessor in a sale to a third party at open market value who receives an arm's length commission for his or her actions as agent. The hon. Gentleman might want to study that in the record.
 The second question on paragraph 89A(4)(c) relates to whether a charter is entered into. The answer is no. The condition must apply throughout the term of the lease if paragraph 89A or C is to be satisfied. With that clarification I hope that the hon. Gentleman's questions have been dealt with. 
 Question put and agreed to. 
 Schedule 32 agreed to.

Clause 169 - Insurance companies

Question proposed, That the clause stand part of the Bill.

John Healey: Clause 169 and schedule 33 make a number of significant changes to the taxation of life assurance companies. They are designed to stop avoidance and close loopholes, but they also make some changes that the industry has been seeking for some time. The provisions stopping avoidance and closing loopholes cover three main areas: case 1 or trading profits, capital gains and transfers of business. I shall explain those areas in more detail when we debate schedule 33 and related amendments shortly.
 I should explain the process of consultation and detailed work that lies behind the clause and the schedule. On 23 December last year, the Inland Revenue issued a detailed press release setting out the Government's proposals. That was followed in January by draft clauses and detailed explanatory notes on those clauses. Since the publication of the press release and the clauses there has been extensive consultation between Revenue and Treasury officials, with representatives of the industry and individual companies. As a result of those discussions, a number of significant changes have been made to the draft clauses. 
 The main thrust of the changes has been to reduce the compliance burden on all companies while retaining the effectiveness of the anti-avoidance measures that are intended to apply to the few companies that have sought to exploit the loopholes. Clause 169 and schedule 33 strike a fair balance between stopping avoidance and closing loopholes, 
 and making a modest reduction in the tax taken from the business. I commend the clause to the Committee.

Howard Flight: I begin by congratulating my right hon. Friend the Member for Fylde because part of the changes embodies that for which he has been arguing for many years in relation to the capital tax gains regime for insurance companies.
 Before we get into the detail of schedule 33, regarding which I have received extensive representations, it has struck me that there is more complexity in the provisions. There are some little bits of stealth tax here and there. The insurance industry is hardly in a state ripe for picking in terms of extra taxation, and what has emerged in the Bill is not what the industry had entirely expected from the preceding consultations. The deduction for policyholder tax is obviously welcome. There is a lot of strong feeling that amounts that would not be taxed under normal savings principles will now be taxed as for a life assurer, which is unreasonable. The treatment of normal transfers to shareholders has also attracted a great deal of criticism. 
 May I flag in advance that most of the amendments are probing amendments, but that amendments Nos. 133 and 134, which I would describe as the Scottish Widows and Friends Provident point, are the most important? I hope that the Government will have some good news for us on that front. 
 Question put and agreed to. 
 Clause 169 ordered to stand part of the Bill.

Schedule 33 - Insurance companies

Howard Flight: I beg to move amendment No. 142, in
schedule 33, page 376, line 8, after '(d)', insert 'subject to subsection (2E),'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 145, in 
schedule 33, page 376, line 8, at end insert 
 'to the extent that it would be taxable under Schedule D Case I if received by any trading company in respect of a trade other than life assurance business.'.
 Amendment No. 137, in 
schedule 33, page 376, line 11, after 'assets', insert 'or other expenditure'.
 Amendment No. 133, in 
schedule 33, page 376, line 20, after '444AC(2)', insert 'or section 444AF(2)'.
 Amendment No. 143, in 
schedule 33, page 376, line 29, at beginning insert 'Subject to subsection (2F),'.
 Government amendments Nos. 159 to 161. 
 Amendment No. 147, in 
schedule 33, page 376, line 44, leave out 'the' and insert 'a'.
 Government amendment No. 162. 
 Amendment No. 148, in 
schedule 33, page 376, line 45, leave out 'the' and insert 'that'.
 Amendment No. 144, in 
schedule 33, page 377, line 2, at end insert— 
 '(2E) Subsection (2)(d) shall not apply to any amount to the extent that is satisfies the conditions— 
 (a) that it would not have been taken into account under subsection (2) but for the amendment by the Finance Act 2003; and 
 (b) that it arises by reason of compliance with an obligation imposed by one or more of the following— 
 (i) a transaction carried out before 23rd December 2002 (including a transfer of business sanctioned by the Court prior to that date) 
 (ii) a transaction carried out at any time for the purposes or in connection with such a transaction. 
 (2F) Subsection (2B) shall not apply to a transfer of an asset made pursuant to an obligation imposed by one or more of the following— 
 (a) a transaction carried out before 23rd December 2002 (including a transfer of business sanctioned by the Court prior to that date) 
 (b) a transaction carried out at any time for the purposes or in connection with such a transaction. 
 (2G) Where the terms of a transaction carried out before 23rd December 2002 are varied after that date so as to impose, in relation to any matter relevant to paragraph (d) of subsection (2) or to subsection (2D), obligations which are significantly different from those which existed prior to the variation, then— 
 (a) in a case where the matter is relevant to paragraph (d) of subsection (2), the transaction shall be deemed for the purposes of subsection (2E) not to have been carried out before 23rd December 2002; and 
 (b) in a case where the matter is relevant to subsection (2D), the transaction shall be deemed for the purposes of subsection (2F) not to have been carried out before 23rd December 2002.'.
 Government amendment No. 163. 
 Amendment No. 138, in 
schedule 33, page 377, leave out lines 15 and 16.
 Amendment No. 139, in 
schedule 33, page 377, leave out lines 22 to 24.
 Amendment No. 149, in 
schedule 33, page 377, line 32, leave out from beginning to end of line 5 on page 380.
 Amendment No. 150, in 
schedule 33, page 382, line 39, leave out from beginning to end of line 12 on page 383.
 Government amendment No. 165. 
 Amendment No. 134, in 
schedule 33, page 392, line 36, at end insert— 
 '444AF: Transfers of business: modifications of s.83(2) 
 (1) This section applies where there is a relevant transfer, under a scheme, of the whole or any part of the business carried on by a mutual insurance company (''the mutual'') to a company which has share capital (''the acquiring company''). 
 (2) In any accounting period of the acquiring company section 83(2) shall apply to so much of the amount brought into account as other income by that company as represents the accrued mutual value, but only as it would have applied before the amendments made by the Finance Act 2003, and if the requirements of subsections (4) and (5) below are satisfied in relation to the shares of a company (''the issuing company'') which is either— 
 (a) the acquiring company; or 
 (b) a company of which the acquiring company is a wholly owned subsidiary. 
 (3) For the purposes of this section the accrued mutual value is the fair value of the assets of the mutual immediately before the relevant transfer less the value of the liabilities of the mutual ascertained as at that date in accordance with section 5 of the Prudential Sourcebook (Insurers). 
 (4) Shares in the issuing company must have been offered, under the scheme, to at least 90 per cent. of the persons who immediately before the transfer are members of the mutual. 
 (5) Under the scheme, the majority of the shares in the issuing company which were in issue immediately after the transfer was made, other than shares which were issued pursuant to an offer to the public, must have been offered to the persons who (at the time of the offer) were— 
 (a) members of the mutual; 
 (b) persons who were entitled to become members of the mutual; or 
 (c) employees, former employees or pensioners of the mutual or of a company which was a wholly owned subsidiary of the mutual. 
 (6) For the purposes of this section, a company is a wholly owned subsidiary of another person (''the parent'') if it has no members except the parent and the parent's wholly owned subsidiaries or persons acting on behalf of the parent or its wholly owned subsidiaries. 
 (7) In this section—
''contract of insurance'' has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;
''employee'', in relation to a mutual insurance company or its wholly owned subsidiary, includes any officer or director of the company or subsidiary and any other person taking part in the management of the affairs of the company or subsidiary;
''insurance business transfer scheme'' has the same meaning as in Part 7 of the Financial Services and Markets Act 2000;
''mutual insurance company'' means an insurance company carrying on business without having any share capital;
''pensioner'', in relation to a mutual insurance company or its wholly owned subsidiary, means a person entitled (whether presently or prospectively) to a pension, lump sum, gratuity or other like benefit referable to the service of any person as an employee of the company or subsidiary.
''relevant transfer'' means a transfer from a company to another person of business consisting of the effecting or carrying out of contracts of insurance which is effected under an insurance business transfer scheme.
(8) The Treasury may by regulations amend subsection (4) above by substituting a lower percentage for the percentage there mentioned. 
 (9) The Treasury may by regulations provide that any or all of the references in subsections (4) and (5) above to members shall be construed as references to members of a class specified in the regulations; and different provision may be made for different cases. 
 (10) The power to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.'.

Howard Flight: I have only had the chance to look in insufficient detail at the Government's amendments, some of which will address some of our points. I should be grateful if the Economic Secretary would indicate that when he speaks to the Government amendments.
 Several areas of the Bill treat life insurance offices in what I think is viewed as an inequitable manner compared with other trading companies, which will place further financial pressure on an industry with problems. Those areas include the taxation of loan funding, the denial of relief for trading losses and the removal of the trading link to the taxation of receipts in trading computations. 
 A number of changes have been made to the draft legislation published in January, some of which were welcome, but there remain concerns where it appears that no account has been taken of the consultations and representations that were made. The changes are considerable, and I ask the Economic Secretary why no regulatory impact assessment was carried out to assess the implications of the Bill. An assessment of the impact is clearly necessary, especially given the wide-ranging nature and application of the many provisions. As well as the tax impact, the cost of the IT changes required by the bed-and-breakfasting provision could be significant.

Nicholas Winterton: Order. Another Division is taking place in the Commons. I have given this matter considerable thought over the past two minutes. I have been in the Chair for five and a half hours now and two and a half hours this morning, making eight hours. Unless the Government rule that consideration be now adjourned, I intend to suspend the sitting for one and a half hours to enable people to have a meal and a rest and perhaps to attend to matters that they have not been able to deal with. We will come back at half-past nine.
 Sitting suspended. 
 On resuming—

Nicholas Winterton: It is almost like old times. Those of us who have been here for a few years are quite used to sitting late, but I am sure that we will not make a habit of this. I am confident that the Committee is about to make fairly rapid progress. We were dealing with schedule 33, to which the lead amendment is No. 142. We will find it convenient to take the Government and other amendments with it.

David Wilshire: On a point of order, Sir Nicholas. I apologise for dashing in when you are on your feet, but I was anxious to be here right at the start. You rightly said that you hoped that we should not make a habit of this, or be here longer than necessary. It is important to put it on the record that the Opposition have worked very hard today not to inconvenience you by dragging you back at this time of night. I do not believe that any accusation that we have wasted time holds water. We made the point on the Floor of the House that there was not enough time for the Committee stage. We have made the point here that there is not enough time.
 It appears that the Government are determined to make a certain amount of progress, which is going to inconvenience you, Sir Nicholas. We tried our level best this afternoon to co-operate, and were even prepared, up to the break, to accept that the Government could move their amendments formally in an attempt to make progress, although, for me, that was going almost a little too far. I want to make it clear that we will make as much progress tonight as possible, but we will not trample on democracy. We will not ignore our duty to scrutinise the legislation fairly and properly, so I apologise to you in advance, Sir Nicholas, if you have a late night.

Nicholas Winterton: As Chairman, I am the servant of the Committee. Whether or not we sit late, it is my duty to be here. I must say that I enjoy it, and it is no inconvenience. As the hon. Gentleman will have heard, I said that we are going back to old times, with the House sitting and doing its job until at least 10 o'clock, or later.
 The hon. Gentleman raises a relevant and important point of order. I do not think that I am revealing anything that a Chairman should not if I say that when I was speaking to the Paymaster General just before I entered the Room, I commented that other than perhaps getting slightly bogged down in the technicalities of environmentally beneficial machinery, the Committee had worked very hard. I could not think of any debate in which there had been any unnecessary delay or filibustering. 
 I concede that, in anyone's opinion, the programme motion is very strict and the knives perhaps come down at times that many Members find inconvenient. However, I repeat to the Opposition Whip, the hon. Member for Spelthorne (Mr. Wilshire), that that motion was a decision of the House, and we have to accept it. I hope that both sides of the Committee will continue to work well together, as they have in all the sittings over which I have presided.

Howard Flight: I congratulate you on your vigour and fortitude, Sir Nicholas, having been in the Chair since 8.55 am.
 I was speaking to the amendments, beginning with amendment No. 142. I was about to make the point that the proposals were billed as anti-avoidance legislation to justify their taking retrospective effect. The changes to section 83 of the Finance Act 1989, and much of the other legislation, are not concerned with anti-avoidance. The provision will result in substantial additional tax liabilities, and the introduction of the legislation with retrospective effect is therefore unjustified. 
 Amendments Nos. 142, 143 and 144 relate to each other. They seek to remove the retrospective effect of the legislation. In particular, new subsection (2) differs significantly from the old subsection (2) in that other income, which was not previously taxable, will be taken into account and taxed. New subsection (2)(b) deems the value of assets transferred from the long-term fund to be brought into account as an increase in long-term assets, which are also taxable. The effect of the provision is retrospective in cases in which other income arises or the transfer from the long-term fund is made pursuant to a pre-existing obligation or an obligation entered into after the date under which the transaction carried out for the purposes of contract occurred. 
 On amendment No. 147, the proposed changes to section 82(2) will unfairly affect life insurance companies by overriding specific tax exemptions, which apply to all other trading companies. However, we welcome the interest on tax repayment being specifically excluded from the provisions. There remains scope for altering the tax treatment of further items, which would normally be regarded as exempt or non-taxable, in line with other trading companies. 
 Amendment No. 147 is a probing amendment; to achieve the balance that we want would only require a modest change.

David Wilshire: The Committee will know that I am not a financial expert. My hon. Friend says that the provision will affect life assurance companies. Can he tell the Committee about its effect on people who have life insurance? Will they get lower payments and be further disadvantaged on top of all the other things that have happened to insurance and pensions companies?

Howard Flight: My hon. Friend is well aware of the fragile state of the life insurance industry. To the extent that those companies' tax bills go up, there are fewer benefits for policyholders. Some companies charge their policyholders in one way; others charge them in another. The risk is that ordinary citizens and their policies will suffer from the stealth taxes introduced by schedule 33. The provision is particularly inappropriate given that the amounts raised will not be huge. It is a massive change to the tax law that fiddles around to the detriment of policyholders while providing no huge advantage to the public revenues.

David Wilshire: Can my hon. Friend confirm that ordinary citizens will end up getting less money than they thought if the Government implement the changes?

Howard Flight: The answer to my hon. Friend's question is yes, but the extent of the loss will depend on many other factors. If life companies pay more tax, the net effect will be that ordinary folk who are the beneficiaries of policies will receive less.
 Amendment No. 137 seeks to grant a statutory deduction for other expenditure. Subsection (2) takes other income into account as a receipt, which means that there is no basis on which income may be adjusted out in accordance with the case 1 principle, except where there is a statutory exception. There is, however, no commensurate deduction for other expenditure, which the amendment would grant.

David Wilshire: Again, if I understand my hon. Friend correctly, if the Government were to accept the amendment, the ordinary citizen would probably lose less money. If they are minded to resist the amendment, they will be taking more money than is necessary from ordinary citizens' insurance policies.

Howard Flight: As ever, my hon. Friend makes his point forcefully. He should wait for the next amendment, which is even more significant for ordinary people. Amendments Nos. 133 and 134 seek to address Scottish Widows and Friends Provident. Although there are major differences between those two demutualisations—one was an acquisition, the other a flotation—they share the key feature that surplus assets accumulated in a mutual environment were transferred to a proprietary company and the members of the mutual received the value of those assets. The members were taxed on their receipts and, in the case of Scottish Widows, substantial amounts of tax were paid. In the case of Friends Provident, members have paid or will pay tax on the disposal of their shares. In both cases, the surplus assets remain
 part of the long-term insurance fund of the transferee company, and they can be transferred to the shareholder's fund only if they are first brought into account in the company's regulatory return.
 Current tax legislation contains provisions governing the computation of trading profit, and in particular provides that any increase in value of the assets of the company's long-term insurance fund is treated as taxable to the extent that it is brought into account in the company's regulatory return. There are difficulties in identifying specific components of any amount so brought into account, and both companies established a special account, which is referred to as a capital reserve, representing the value of the surplus assets transferred from the mutual in order that the value might be clearly identified. Tax counsel has advised both Scottish Widows and Friends Provident that the existing tax position is clear, and that transfers out of their respective capital reserves do not constitute increases in the value of their assets and are not taxable in the transferee company. 
 The Finance Bill states that all amounts brought into account in a life company's regulatory return are taxable, regardless of their nature or origin. If the provision were enacted, it would impose a tax on Scottish Widows and Friends Provident at the point at which their respective capital reserves are transferred out to shareholders. In other words, it will result in double taxation of the two organisations' surpluses. Those surpluses arose in a non-taxable mutual environment and belong to policyholders, who paid tax on the value of the surplus assets when Scottish Widows was acquired and Friends Provident was listed. Taxing the same surplus assets now would impose an unfair liability, and the Revenue has acknowledged that the surpluses were properly created in a post-tax environment.

David Wilshire: I am listening ever so carefully to my hon. Friend and am trying to ensure that I fully understand his argument. We are discussing money on which tax has been paid and which would otherwise go to policyholders who have paid their premiums. They will now get less money because the Government want to tax them a second time. Is that what my hon. Friend is trying to get me to understand?

Howard Flight: Not quite, but nearly. My hon. Friend will recollect that both organisations were mutuals. As I commented when one was listed and the other sold, the members of those mutuals were entitled to the proceeds. What they have received is taxable, and tax has been paid. The point that I have tried to make at some length, because it is quite complicated, is that if the Bill goes through as drafted, the undistributed reserves due to go to shareholders would suffer double taxation. Therefore, we are talking here not about policyholders, but about the hundreds of thousands of people who were mutual members of Scottish Widows and Friends Provident.

David Wilshire: I am beginning to grasp the situation. My hon. Friend refers to reserves. Am I right in understanding that those reserves have been accumulated after tax has been paid?

Howard Flight: Yes, historically. The element of double tax arises from the fact that the ex-mutual members have paid or will pay tax. To the extent that they have not had all their money yet, they will pay tax on it when they get it, but now an extra tax will be levied when the funds flow out of the reserve account.
 The amendments would ensure that a proper amount of tax is paid by policyholders and companies on the surpluses and would prevent double taxation. Because of the double taxation, the Bill could result in capital being locked into the life funds of Friends Provident and Scottish Widows, which the groups may wish to utilise elsewhere in their business or for further acquisitions. If that were so, the practical impact of the provisions would be commercially damaging, as well as leading to double taxation.

David Wilshire: This gets worse and worse. Can my hon. Friend tell me what the commercial damage would be? Again, not being a financier, I do not understand these things, but it would be helpful if my hon. Friend could enlighten me on the damage.

Howard Flight: I had just endeavoured to explain that the funds would be locked into the respective life funds and could not be used by those two groups elsewhere in their business because of the tax penalties that would result. Therefore, in essence it would be dead capital that could not be constructively used.
 There are other affected parties. The draft clauses would affect the ability of other companies to demutualise efficiently. The Scottish Widows transaction provided policyholders with immediate cash value for surplus assets, something that no other demutualisation has done. Other potential acquirers of mutual companies would not wish to pursue the same route, faced with a potential double tax charge. My understanding is that the Treasury and the Revenue have taken a more sympathetic approach to this matter, and I hope that the Economic Secretary will be able to make a useful comment on the Government possibly reconsidering these provisions. 
 I do not wish to speak to amendment No. 147, as it duplicates another amendment. Amendment No. 148 seeks to clarify the operations of one of the proposed provisions. Proposed new section 83(2C) provides that proposed new section 83(2B) will apply to the repayment of loans only if the loans were brought into account for the period of account but were not taxable for the period of account under section 83(2), but it is not clear to which period of account the measure refers. I understand that the intention is that the section will apply to the period of account in which the loan is made, rather than the period in which the repayment is made. It would be helpful if that could be clarified.

David Wilshire: I understand what my hon. Friend says, but what would be the difference between the two periods? I am trying to get my mind around that, as I am not the expert that he is. Can he explain what the impact would be if one period were preferred to the other?

Howard Flight: It is relatively self-evident that there are two crucial issues: when tax will eventually be paid,
 whether sooner or later; and how much tax will be assessed. There is an important matter of tax cost timing but also a need for clarity, which is a major part of what the amendment is about.

Kali Mountford: I am at a loss to understand whether Opposition Front-Bench Members understand the clause or their amendments. It seems from the interventions that the Opposition have not consulted each other on them. Is that the case?

Howard Flight: I thank the hon. Lady for that question. I am pleased to advise her that our amendments and briefing notes are regularly circulated to the members of our team, and we regularly meet for briefings and updates. However, she will be aware that the subject is very complex. Indeed, it is one that I do not claim to be on top of or about which I know as much as I could. Therefore, many hon. Members may not fully realise the implications of the Government's proposals or the Opposition amendments that have been tabled to ameliorate them.

Kali Mountford: I am grateful for and understand that explanation. However, I would understand it better had not all the Opposition Front-Bench Members put their name to the amendments. Is not it the case that the Opposition agree to amendments before tabling them?

Howard Flight: Of course everyone agrees the amendments before they are tabled, but being refreshed as to their full implications is, with respect, quite another matter. However, I thank the hon. Lady for livening up our proceedings.
 Let me rattle through the amendments as speedily as possible. Amendments Nos. 138 and 139 concern the proposed changes to section 83(6) and (9) of the Finance Act 1989, which are covered in paragraph 2 of schedule 33. The changes will have a significant impact on commercial reinsurance transactions undertaken by life insurance companies and could levy a significant tax cost on transactions for which there will be no tax motivation, while in effect denying relief for trading losses. 
 The legislation does not take account of the fact that reinsurance arrangements are central to the business of insurance and that companies enter into such arrangements for purely commercial reasons. The proposals apply only to reinsurance arrangements that could be viewed as alternatives to a transfer of business. However, the Bill could go further and have an impact on a wide range of commercial reinsurance arrangements.

David Wilshire: Now I am on ground that I understand. The reference to trading losses is familiar to me. When I ran a business I knew all about trading losses. I also knew perfectly well that in the years in which I made a loss I could offset it against profit that I made. Are the Government trying to tax people when they make a profit and make them suffer when they make a loss?

Howard Flight: At the bottom of the heap, yes, but, as I will explain, the main impact is that the costs of reinsurance could be increased substantially and its availability could be limited. The latter effect, in a market in which there are already acute problems in obtaining professional indemnity cover and employer's liability cover, could be significantly damaging in a wider economic context.
 It is quite common for only one life insurance company in an insurance group to write business directly to the public and then reinsure part of that business to a pension company or a linked company to manage the business more efficiently. Under the Bill, companies that suffer trading losses will be taxed on capital added to the long-term insurance fund in connection with such reinsurance arrangements. That effectively denies relief for trading losses on reinsured business and means that companies will be penalised for using reinsurance to assist in funding new business. 
 The amendment, which would bring pure reinsurance within section 83(3), would have a significant impact on all reinsurance groups. The requirement for additional capital to fund a loss is not uncommon for any company and the pure reinsurers are no exception. It is unjust for companies to be penalised by the proposed arrangements as a result of the nature of their trade. The proposals would make it extremely difficult for pure reinsurance companies to capitalise themselves without suffering adverse tax consequences.

David Wilshire: I am listening carefully to my hon. Friend, and I heard him say that if things were to go ahead as the Government want, there would be a real risk that the cost of reinsurance would go up and its availability might decline. Is there any possibility that if the measures were to go ahead, businesses in this country would be forced to look abroad for the same sort of reinsurance cover that they might otherwise have got in London? If that were the case, would that not start to undermine the London insurance market and play into the hands of foreign competitors?

Howard Flight: My hon. Friend will be aware that the London reinsurance market is already relatively uncompetitive and losing business as a result of past tax changes. The provisions could worsen that problem. As I commented, there are the dual effects of the failure of trading losses relating to reinsurance to be relieved and the knock-on effects on the reinsurance market.
 I am focusing on amendments Nos. 138 and 139. Paragraph 2 will amend section 83 of the Finance Act 1989. It is an anti-avoidance provision that requires certain additions to the long-term fund of a life insurance company to be treated as taxable for the purpose of ascertaining whether the life insurance company has made a loss in a computation prepared on case 1 principles, for profit computations for pension business, individual savings account business, overseas life assurance business and life reinsurance business. The overall notional case 1 profit computations determine the element of the company's profits to be taxed at shareholder rates. 
 For the provision to apply, the addition needs to have been made as part of, or in connection with, a transfer of business. Even under current law, the provision is widely drafted and capable of disallowing losses that are unconnected with the addition, for example, those that arise on new business. Paragraph 2(6) and (9) propose the widening of the definition of transfer of business. That definition already includes reinsurance as equivalent in practical terms to the transfer of a portfolio of contracts, but does not include reinsurance with a pure reinsurer, or reinsurance of new business. Those changes were not signalled in the press release of 23 December 2002, nor were they discussed with consultees prior to the release of the Finance Bill. The amendments are designed to prevent the widening of the definition of transfer of business. 
 Amendment No. 149 is essentially a probing amendment. Paragraph 3, which is key, introduces a provision in respect of contingent loans to life companies. It is a relieving provision and, as such, is welcome in principle. However, it does not go far enough and could accelerate tax in non-abusive situations. Amendment No. 149, like further detailed amendments that we may table later, seeks to deal with those situations. This amendment has been tabled as a probing amendment, in case it is not possible to pursue such additional amendments later. 
 The Revenue's aim has been stated in correspondence and in the explanatory notes as being to catch only abusive transactions, without penalising commercially motivated transactions. However, the legislation does not meet that aim and could affect the ability of insurance companies to achieve their required solvency positions. We believe that the legislation should be amended to allow the transfer of normal surplus to shareholders without penal tax costs. For those purposes, normal surplus should be surplus not funded out of or in connection with a contingent loan. The proposal to link allowed transfers to shareholders only to bonus payments is clearly inappropriate where a contingent loan is made to a non-profit fund, for which are no bonus payments. 
 Amendment No. 150 seeks to address the changes that paragraph 9 makes to section 432E of the Taxes Act 1988, which will tax mutual insurers on any surplus after allowance for the declaration of bonus. Although such a situation is unusual, it is not unheard of. The proposals could unjustly tax certain mutuals, for example when a mutual has two sub-funds and the Financial Services Authority allows one to declare surplus to support the other. In that situation, the mutual has no surplus overall, but the proposals will tax the surplus on the sub-fund that is providing support. The intent is to address a particular arrangement on the demutualisation of a business, so this relates to the points raised under amendments No. 133 and 134. 
 The Revenue is attempting to address a problem that it has seen as an abuse, but we feel that the provision should be amended to target only certain arrangements, such as a demutualisation within a 
 certain period following the declaration of a surplus, or when the position of the long-term insurance fund as a whole is taken into account. 
 Amendment No. 151 is essentially a probing amendment.

Nicholas Winterton: Order. I have selected amendment No. 151 for debate on its own, later on.

Howard Flight: I am sorry, I thought that they were all grouped together.
 I cannot believe it, but I seem to have ploughed through my several points. I trust that the Economic Secretary will be aware of most of them, as I know that there have been representations to the Revenue, and just the other day there was a major industry conference in which the Revenue participated. I know that the industry does not want the Treasury to think that it does not acknowledge some of the favourable aspects of the reforms; but the industry, its advisers and I feel that the points that we have referred to are on provisions that do not do anything helpful and the issues that they deal with could be better addressed. 
 I have spoken to all the amendments in the group. As I commented earlier, we will want to press amendments Nos. 133 and 134 to a vote later, in whatever constitutional way we may, if the Government do not agree to accommodate them in some way.

Jonathan Djanogly: There are many problems with the schedule, and we have received an enormous number of representations on it. The Opposition amendments show that we believe that many changes need to be made, and the number of Government amendments to the schedule makes it clear that we are not the only ones who think that it is not yet right.
 The schedule closes loopholes, but it potentially creates taxes for many more people. It is worth reiterating the point that my hon. Friend the Member for Arundel and South Downs made: the Bill contains many pages of legislation, but we are not entirely clear how great an effect for the good they will have. 
 These provisions are extremely complicated. Although I shall speak to the amendments, I am sure that everyone will be pleased to hear that I shall switch to plan B and distil my remarks down to five key points and questions. First, paragraph 2 seems to be retrospective in effect. It relates to cases in which other income arises or a transfer is made from a long-term fund, pursuant to a pre-existing obligation before 23 December 2002 or an obligation entered into after that date under a transaction carried out for the purposes of a contract or transfer scheme made or sanctioned by the court before that time. What is the Minister's view on that? 
 Secondly, it does not seem appropriate that, under paragraph 2, amounts that would not be taxed under normal trading principles will potentially be taxed for a life assurer through group relief receipts, capital contributions from other companies and other capital receipts. Thirdly, the schedule could cause an acceleration of tax for innocent commercial loans. 
 With regard to contingent loans, the deduction given in new section 83ZA has a limit clearly calculated by reference to normal transfers to shareholders based on a 90:10 ration fund. However, as the Law Society has pointed out, under this proposal, when a non-profit company has a surplus and a transfer to shareholders is funded from that surplus, the end result is unreasonable. 
 My fourth point is another Law Society point and relates to anti-avoidance. The main purpose of the schedule is to require that additions to the long-term fund of a life assurance company be treated as taxable to ascertain whether the company has made a loss in a computation prepared on case I principles. For the anti-avoidance provision to apply, the addition needs to have been made as part of or in connection with a transfer of business, but even under current law the provision is widely drafted and capable of disallowing losses unconnected with the addition. 
 Finally, the widening of the definition in sub-paragraphs (6) and (9) of paragraph 2 of transfer of business, which already includes most reinsurance, but not reinsurance with a pure reinsurer or reinsurance of a new business, is not welcome, and many people have responded on the schedule. The scope of section 83(3) of the Finance Act 1989 is believed by many to be too wide, so amendments to sub-paragraphs (6) and (9) have come as a surprise, particularly as they were not mentioned in the 23 December press release.

John Healey: We are considering a significant schedule and a large number of amendments, on which some serious arguments have been made, particularly by the hon. Member for Arundel and South Downs. However, I shall start with one argument that is not so serious.
 The idea that the combined effect of clause 169 and the schedule puts life companies at a disadvantage is wrong, as is the idea that it is a set of stealth taxes that increases the life assurance industry's overall tax burden. The combined impact of the clause and the schedule will reduce the overall amount of tax payable by insurers by an estimated £40 million a year by 2004. 
 Those measures will not raise the general level of tax payable by insurers, but will prevent a small number of companies from exploiting their circumstances to pay much less tax than other companies writing similar business. The changes will therefore protect the tax base and ensure a fairer distribution of tax across the industry. 
 The hon. Gentleman paid tribute to the right hon. Member for Fylde, who I am sad to see is not in his place. Each year for a number of years the right hon. Gentleman has tabled a new clause to the Finance Bill and has argued for a reduction in the rate of tax on the capital gains that a life assurance company pays on behalf of its policyholders. He, like the industry, will welcome the fact that the Government have accepted his proposal this year­in paragraph 12 of schedule 33­and are reducing the rate from 22 per cent. to 20 per cent. The right hon. Gentleman did not realise when he made his speech in the Chamber on Second 
 Reading that we had made that change. I am glad that he can be in no doubt of it now. Our view was that it is right to make the change now as part of the package of changes that the clause and schedule introduce. 
 The hon. Member for Arundel and South Downs also referred to an assessment of impact. He will know that no regulatory impact assessment is required for anti-avoidance measures. Nevertheless, Revenue officials have worked hard with the industry, and especially the Association of British Insurers, to modify the original proposals to meet the industry's concerns about compliance costs. That is particularly the case with the bed-and-breakfasting measures that the hon. Gentleman mentioned, where we have changed the approach to reflect a suggestion from the ABI and have excluded losses between 23 and 31 December totalling less than £10 million per company. An exclusion for interfund transfers to match assets with limited liabilities has also been introduced as a result of those discussions. 
 The hon. Gentleman and the hon. Member for Huntingdon raised the spectre of retrospection. It is standard practice for anti-avoidance rules to be announced in the news release with the intention that the legislation will apply from the date of the news release. I see that the hon. Member for Arundel and South Downs is nodding his head, so he accepts that point. Experience showed that the tackling of avoidance often took place at the end of the calendar year. The legislation announced on 23 December was designed to tackle that, and was made public as soon as possible. Parliament now, quite properly, has a chance to debate the legislation. Let me be clear on the matter: there is nothing retrospective about the changes. The only effect is on the computation of profits for periods after the date of the announcement. The changes may affect future profits arising from past transactions, but there is nothing unusual in that. 
 I shall deal with the accusation that the measure is somehow double taxation. I refute that; no profits are being taxed twice. However, compensation paid to former members of mutuals was in principle liable to capital gains tax, but in practice little tax would have been paid. The argument that the hon. Member for Arundel and South Downs appears to be making is that when a business is sold, the price paid for the business should be deducted from future profits. That does not happen to other businesses, and there is no reason why it should happen in this case. 
 The real issue is not double taxation of profits, which will not happen, but the creation of wholly spurious losses, despite the fact that mutuals could never have had losses. There is no justification for creating tax losses when there are profits in both the regulatory and Companies Act accounts. That would be wholly unjustifiable and a raid on the Exchequer. 
 I shall now deal with the amendments, and will briefly touch on the most significant of the Government amendments. In introducing clause 169, I emphasised the process that we have conducted in preparing the measures set out in the clause and the schedule. As a result of the consultation, schedule 33 
 reflects a large number of the changes, most of which have been welcomed by the industry. It also contains one or two extra measures to stop further avoidance schemes that had come to light. It contains, to the universal approval of the industry, that long-sought reduction in the corporation tax rate for all life assurance companies. The measures are not wholesale increases in the tax charge imposed without warning on an unsuspecting industry, but have been refined through an open, consultative process to reduce the compliance burden on companies while maintaining their effectiveness in ending avoidance. 
 All the amendments we are considering in this large group concern how the trading or case I profits of life insurance companies are calculated, which is why both Government and Opposition amendments have been taken together. The hon. Gentleman described the Opposition amendments as mainly probing amendments. I shall attempt to explain why we are encouraging him to withdraw the amendment. If he will not, I shall ask my hon. Friends to reject it. The hon. Gentleman stressed the importance of amendments Nos. 133 and 134. They are important and they are different from the other amendments. They concern something that is not in the schedule, because they deal with life assurance companies that have demutalised. 
 Amendment No. 133 is consequential to amendment No. 134, so I shall deal with the latter. It would remove from the trading profits of the demutalised business unrecognised market value increases that took place while the business was owned by a mutual insurer. Before the Budget we received strong representations from two companies running previously mutual businesses, which asked for such a measure. Their representations were carefully considered by Ministers. All the possible options were considered, but we decided we could not, and would not, give the companies what they were asking for. There is an important dispute over what they are asking for. 
 The companies think—the hon. Member for Arundel and South Downs confirmed that their counsel offers this advice to them—that the current law allows them to leave out of account for tax hundreds of millions of pounds of profit, which means that they may end up with massive tax losses that are not reflected in the accounts. They think that the schedule changes the law to stop that. The Inland Revenue, backed by counsel's advice, takes the view that what the companies want to do is not allowed under current law. The schedule puts that beyond doubt for the future. Our judgment is that it is better to do that than to leave the matter entirely to litigation, which can never be certain. There may be litigation for the past, but the position should be clear for the future. Unlike those advocating the amendments, the Government believe that the current law is the right approach. 
 The amendment could allow hundreds of millions of pounds of losses to arise for tax purposes, even when the company's regulatory return and statutory accounts showed a surplus. Apart from the obvious 
 problem of a provision with that effect, it is significant that a trading loss for tax purposes cannot arise in a mutual company. The supporters of the amendment are saying that, as the business could not have made a trading profit if it had remained a mutual company, it should be allowed to generate a loss, which could never have happened in a mutual company. The hon. Member for Arundel and South Downs wants to have the cake and eat in a big way. 
 It will be clear from what I have said that we believe that the law should be what our legal advice says it is and what schedule 33 makes certain it will be when the Bill becomes law. 
 Under amendment No. 137, which, as the hon. Gentleman said, was proposed by the Law Society, all items shown as ''other expenditure'' in the revenue account and the FSA return of a life assurance company must be deducted whatever their nature. Some argue that that is only fair because the changes to section 83(2) of the Finance Act 1989 and the Bill bring in all receipts in that revenue account as income. The answer is twofold. First, changes to section 83 are intended to put beyond doubt what is already the case for most items of income. Secondly and more importantly, there are clear exceptions in the schedule to the rule that income shown in the return is also income for tax purposes. There are three exclusions: one for notional income, another for other amounts which represent previously taxed amounts and a third for amounts that are exempt from tax. There are no such exclusions in the amendment. 
 Amendments Nos. 138 and 139 refer to changes in the Bill that will have effect from 9 April—Budget day. There may be a misunderstanding. In amendment No. 138, the complaint is that pure reinsurers will be unable to take on business because their losses will be restricted. The section concerned applies only to a limited class of reinsurers and not when a reinsurer takes on only the morality risk in a policy. That is what pure life reinsurers mostly do. There is concern about the London reinsurance market, but in our judgment there should be none. In the UK, life reinsurance is a niche market with very few big players. The schedule will have no effect on commercial reinsurance arrangements. It is aimed at transfers of business dressed up as reinsurance. 
 Amendment No. 139 may also be based on a misunderstanding. Some companies have realised that they can generate artificial losses by creating a new company to reinsure a stream of new business in the old company. It surrenders those losses as group relief but, although it is a new company, it is not a start-up company. The previous Government was concerned about protecting start-up companies when they put the rules in place in 1996. 
 I shall next deal with amendments Nos. 142 to 144. In many ways, only amendment No. 144 is substantive, but it suffers from difficulties that are similar to those of amendment No. 134. It makes assumptions about existing law that are not necessarily correct. If the Inland Revenue is right about existing law, the amendment achieves nothing. However, the real thrust of the amendment is to remove what the Law Society considers the retrospective nature of the 
 changes. I have explained that there is nothing retrospective about them. They were announced on 23 December 2002, before the legislation took effect. 
 Amendment No. 145 is also aimed at much the same point, but it would remove not only items that arise from a transfer of business, but all of them. It assumes that section 83(2), as amended by paragraph 2 of the schedule, changes the law fundamentally, but that is not right. Therefore, amendment No. 145 is also based on a mistaken premise. 
 Amendment No. 149 would delete the whole of the new rules about contingent loans. Following extensive consultation, the draft rules on contingent loans were changed so that they will not affect loans made to insurers for solvency purposes but will stop insurers using contingent loans to avoid tax. 
 The hon. Member for Arundel and South Downs argued that companies should be able to use such loans to make shareholder distributions without, I believe, a tax charge. It remains a key feature of the rules for computing case I profits of life companies that a company has considerable control over the emergence of profits. It can defer the recognition of gains and so defer the emergence of profits, in which case the deferral is followed for tax purposes. However, a company can also accelerate the emergence of profits—the use of contingent loans is one way of doing just that—thereby allowing shareholders to receive the profits earlier than would otherwise have been possible. The new rules are designed to ensure that the accelerated extraction of profits is also followed for tax purposes. To allow contingent loans to be used to fund shareholder transfers would completely undermine the objective of the legislation. 
 I am aware that not everyone in the industry is convinced that only abusive uses of contingent loans will be caught. I suggest to the industry, through the hon. Gentleman, that those who believe that to be the case and believe that they have arguments to support their position should come up with specific, hard examples to demonstrate it. I encourage them to contact Revenue officials, because if Ministers are required to consider the matter further, we will do so. 
 Amendment No. 150 is another wrecking amendment.

Nicholas Winterton: I hope that the Economic Secretary will rephrase that, because the amendment would not have been selected if it were a wrecking amendment.

John Healey: Amendment No. 150 would wreck the purpose of the provisions that we are trying to put in place in the schedule, which aims at removing a special rule that assumes that a mutual company can never have a surplus. In most cases, mutuals do not have a surplus. However, some mutual companies that have demutualised have exploited the rule to ensure that profit is sheltered from tax while in the mutual and never brought to account for tax purposes. Sub-paragraph (3) removes a rule that helps tax avoidance.
 Before I move on to speak briefly about Government amendments, I should say that I stumbled a little earlier. I may have said about reinsurance that section 83(3) does not apply if a reinsurer takes on only the morality risk.

Howard Flight: Mortality!

John Healey: The ever-vigilant ears that accompany our proceedings caught that slip of the tongue.
 Government amendments Nos. 159 to 161 make a slight technical change to section 83 of the Finance Act 1989 by inserting a new subsection. The amendments will ensure that the legislation charges to tax only its intended objectives. Government amendment No. 162 operates in the same area as those amendments, but the change is even smaller. It changes ''the'' to ''any'' and performs the same function as Opposition amendments Nos. 147 and 148, but it is more economic and grammatical. It is, however, potentially significant because it protects the Exchequer. Without it, a company that used a loan to reduce its tax liability before 2003 would escape any tax charge, even when it repaid the loan. 
 Government amendments Nos. 163 and 165 are designed to ensure that there is no loss of tax when a life assurance company transfers its entire business to another company. A great deal of tax is at stake if the loophole is not closed, and I contend that it is clearly right to do so. 
 When I examined the clauses while preparing for the Committee, I had some detailed discussions with officials who have lived with the policy area for a good while. They said that it is the most complicated area of tax legislation that any of them have faced in their careers. In the light of that judgment, the Committee has managed rather well tonight by thoroughly scrutinising the proposals in the clause and the schedule. I recognise, however, that there has not been a lot of time to scrutinise the detail of the provisions in clause 169 and schedule 33 since they were published in the Bill. 
 I therefore suggest to hon. Members and those who advise them that if some bodies still have concerns about the provisions in the Bill, they should develop those detailed concerns, show the evidence on which they are based and enter into detailed discussions with Revenue officials. If there are real problems with which we must deal, Ministers will consider whether something appropriate should be done at a later stage. In the light of that concluding statement, I hope that Opposition Members will not press their amendments. If they decide to press them, I must ask my hon. Friends to reject them.

Howard Flight: I thank the Economic Secretary for his comprehensive review of the highly complex measures at such a late time in the evening. In the main, he has satisfied the concerns raised by our amendments.
 There is one matter on which I am certainly not satisfied. When he discussed amendments Nos. 133 and 134, which address whether past surpluses achieved by insurance companies are taxable, he suggested that profits are currently escaping tax. He 
 would agree that those surpluses arose during the non-taxable mutual environment and did not arise after those businesses became commercial businesses. Economically, those surpluses must surely belong to the policyholders who paid tax on the value of the surplus assets when Lloyds acquired Scottish Widows and when Friends Provident was listed. 
 The Economic Secretary will know that there is disagreement between leading tax counsels. It is clearly a material point, given the problems that such businesses face in the present environment, which have done so much damage to Equitable Life. As well as the straight legal argument, there is a practical argument in relation to underlying businesses. I therefore do not want to press our amendments, with certain exceptions—we still feel that the Government's stance is not entirely correct and we want to flag that up. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendments made: No. 159, in 
schedule 33, page 376, line 30, leave out 
 'in a period of account'.
 No. 160, in 
schedule 33, page 376, line 32, after 'account' insert 
 'in which the transfer takes place or any earlier period of account'.
 No. 161, in 
schedule 33, page 376, line 34, after second 'account' insert 
 'in which the transfer takes place'.
 No. 162, in 
schedule 33, page 376, line 44, leave out 'the' and insert 'any'.
 No. 163, in 
schedule 33, page 377, line 2, at end insert— 
 '(2E) If subsection (2B) above applies in relation to the transfer of all the assets of the company's long term insurance fund in accordance with— 
 (a) an insurance business transfer scheme, or 
 (b) a scheme which would be such a scheme but for section 105(1)(b) of the Financial Services and Markets Act 2000 (which requires the business transferred to be carried on in an EEA State), 
 the reference in that subsection to an amount being deemed to be brought into account for the period of account in which the transfer takes place is to its being so deemed for the period of account ending immediately before the transfer takes place.'.
 No. 164, in 
schedule 33, page 386, leave out lines 41 to 43 and insert 
 'In arriving at the policy holders' share of chargeable gains accruing to an insurance company under subsection (10) above there is to be ignored—'.—[John Healey.]

Howard Flight: I beg to move amendment No. 151, in
schedule 33, page 387, line 38, leave out from beginning to end of line 9 on page 389.
 The bed-and-breakfast provisions as set out in paragraph 14 are widely accepted as a significant improvement on the original draft legislation, but there are some areas of minor concern. There are certain inconsistencies between the way in which the legislation will apply to life companies as compared with other trading companies. New section 21OB(6) excludes annual deemed disposals of unit trust holdings, but does not exclude all transactions 
 relating to section 212 assets. The exclusion of those assets from the law altogether would significantly reduce the compliance burden for many companies, as it would be considerably easier for their capital gains tax systems to exclude the class of assets. Reducing the systems burden caused by the proposals is a significant matter. 
 Amendment No. 151 is not ideal and, after further consultation, we have worked out a better amendment. It is, therefore, a probing amendment to see whether the Government have thought about the system at issue and have anything constructive to offer.

John Healey: The amendment would delete the new provisions in the Bill intended to stop life companies from using bed-and-breakfasting assets to generate capital losses. It is perhaps appropriate that we are considering the provision at this stage of our proceedings.
 Bed and breakfasting is when companies sell assets and buy them back almost immediately to create capital losses. All other companies are subjected to rules designed to stop bed and breakfasting. The Bill introduces a rule for life companies tailored to their particular circumstances. 
 There has been extensive consultation with the industry on these measures and, in particular, on the costs to it of complying with the new rules and the start date. Changes have been made as a result of that consultation to reduce the compliance costs and make the measures more workable for insurers. 
 The hon. Gentleman asked about deemed disposals of unit trusts and their exclusion. Deemed disposals are subject to special rules that spread any gain or loss over a seven-year period. Because of the spreading rule, it was not necessary to include deemed disposals in the bed-and-breakfasting rules. Actual disposals are not subject to the spreading rule, so can be used for bed and breakfasting to create losses. For that reason, it would be inappropriate to exclude all disposals of unit trusts, as that would leave an obvious loophole in the legislation. 
 With that explanation, I hope that the hon. Gentleman will agree to seek to withdraw the amendment.

Howard Flight: I think that the Economic Secretary is saying that if unit trusts were put into the same category as other financial assets, that could be disadvantageous in tax terms to insurance companies. That is why negotiations and discussions so far have resulted in these differences.
 This is essentially a probing amendment. The Economic Secretary has satisfied me that the territory has been gone over well, but I should be grateful if he could clarify the point about unit trusts.

John Healey: I believe that that is the case.

Howard Flight: Right. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 165, in 
schedule 33, page 389, line 45, leave out 
 'the purposes of corporation tax' 
 and insert 
 'all purposes of corporation tax other than determining for the purposes of section 83(2B) of the Finance Act 1989 whether a transfer is brought into account as part of total expenditure.'.—[John Healey.]
 Amendment proposed: No. 134, in 
schedule 33, page 392, line 36, at end insert— 
 '444AF: Transfers of business: modifications of s.83(2) 
 (1) This section applies where there is a relevant transfer, under a scheme, of the whole or any part of the business carried on by a mutual insurance company (''the mutual'') to a company which has share capital (''the acquiring company''). 
 (2) In any accounting period of the acquiring company section 83(2) shall apply to so much of the amount brought into account as other income by that company as represents the accrued mutual value, but only as it would have applied before the amendments made by the Finance Act 2003, and if the requirements of subsections (4) and (5) below are satisfied in relation to the shares of a company (''the issuing company'') which is either— 
 (a) the acquiring company; or 
 (b) a company of which the acquiring company is a wholly-owned subsidiary. 
 (3) For the purposes of this section the accrued mutual value is the fair value of the assets of the mutual immediately before the relevant transfer less the value of the liabilities of the mutual ascertained as at that date in accordance with section 5 of the Prudential Sourcebook (Insurers). 
 (4) Shares in the issuing company must have been offered, under the scheme, to at least 90 per cent. of the persons who immediately before the transfer are members of the mutual. 
 (5) Under the scheme, the majority of the shares in the issuing company which were in issue immediately after the transfer was made, other than shares which were issued pursuant to an offer to the public, must have been offered to the persons who (at the time of the offer) were— 
 (a) members of the mutual; 
 (b) persons who were entitled to become members of the mutual; or 
 (c) employees, former employees or pensioners of the mutual or of a company which was a wholly-owned subsidiary of the mutual. 
 (6) For the purposes of this section, a company is a wholly-owned subsidiary of another person (''the parent'') if it has no members except the parent and the parent's wholly-owned subsidiaries or persons acting on behalf of the parent or its wholly-owned subsidiaries. 
 (7) In this section—
''contract of insurance'' has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;
''employee'', in relation to a mutual insurance company or its wholly-owned subsidiary, includes any officer or director of the company or subsidiary and any other person taking part in the management of the affairs of the company or subsidiary;
''insurance business transfer scheme'' has the same meaning as in Part 7 of the Financial Services and Markets Act 2000;
''mutual insurance company'' means an insurance company carrying on business without having any share capital;
''pensioner'', in relation to a mutual insurance company or its wholly-owned subsidiary, means a person entitled (whether presently or prospectively) to a pension, lump sum, gratuity or other like benefit referable to the service of any person as an employee of the company or subsidiary.
''relevant transfer'' means a transfer from a company to another person of business consisting of the effecting or carrying out of contracts of insurance which is effected under an insurance business transfer scheme.
(8) The Treasury may by regulations amend subsection (4) above by substituting a lower percentage for the percentage there mentioned. 
 (9) The Treasury may by regulations provide that any or all of the references in subsections (4) and (5) above to members shall be construed as references to members of a class specified in the regulations; and different provision may be made for different cases. 
 (10) The power to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.'.—[Mr. Flight.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 3, Noes 11.

Question accordingly negatived.

Howard Flight: I beg to move amendment No. 152, in
schedule 33, page 394, line 13, at end insert 'assets'.
 I shall be exceedingly brief. This is a probing amendment, as it seems unclear that the apportionment rules set out in paragraph 20 will produce the correct result if the transferred business was previously reinsured by the transferer to the transferee. Thus the liabilities would be included in the opening liabilities of the transferee. I understand that such a situation is not unusual. Our amendment is designed so that the provision would not apply to situations in which assets had previously been transferred under reinsurance arrangements.

John Healey: I accept that the amendment is a probing one. I understand that a major firm of accountants is advocating the amendment, and that it thinks that the amendment will make the provision work properly when one company that has reinsured business with another transfers that business to the reinsurer. There may be situations in which the provision does not give quite the right answer. I suggest that the hon. Gentleman's advisers get together with Revenue officials to establish whether there is a problem. If there is a problem, the solution is not just to add the word ''assets'', as the amendment does. On that basis, I hope that the hon. Gentleman will withdraw it.

Howard Flight: I thank the Economic Secretary for his response. If the problem that has been suggested to me exists, there is a route to solving it. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 33, as amended, agreed to.

Gillian Merron: I beg to move, That further consideration be now adjourned.

David Wilshire: I realise that that is a debatable motion. I promise the Committee that I am not about to debate it. I simply want to put on record that after a hiccup the usual channels are back on track, and I am grateful for that.

Nicholas Winterton: I am grateful to the hon. Gentleman. I hope that before they leave the Committee Room
 tonight, both Whips will clarify for the Chair how and when the knives will be out, and where they will fall.
 Question put and agreed to. 
 Adjourned accordingly at eleven minutes to Eleven o'clock till Thursday 22 May at five minutes to Nine o'clock.